Adjusting entries are important in order to prepare correct and up-to-date financial reports. There are two basic categories of adjusting entries. These are deferrals and accruals. In a deferral adjustment, cash will be paid before an expense is incurred or the cash will be received before the revenue is earned. Accruals adjustments are the opposite of deferrals. An accrual records an expense before the cash is paid, or it records the revenue before the cash is received. The two basic categories of adjustments can be divided into four different types as follows:
1. Deferred (Prepaid) Expenses
2. Deferred (Unearned) Revenues
3. Accrued Expenses
4. Accrued Revenues